Author Topic: What would you do?  (Read 2610 times)

jleo

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What would you do?
« on: November 15, 2017, 03:50:28 PM »
I need advise on where to put some cash. I am fairly new to MMM so take it easy on being so much in cash! Just worried about the market right now I would hate to invest when my gut is telling me not to.

Currently 27

225k in Personal Savings earning 1.25%

450k in Business account earning near nothing

Investments- 15k

Debt-

Mortgage owe 290k @ 4.375% home is worth 500k

Business loan 155k @ 3.95%

I am stuck on if paying down these loans is a good option but with the money as cheap as it is it is a hard call for me, I thought about flipping homes or something along the lines of real estate but the home prices so high in my area the numbers are very tight. I am looking for a fairly safe investment and seems like paying down the loans is the only safe bet over 2% currently. I am also at about 200k salary if that helps at all.


MDM

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Re: What would you do?
« Reply #1 on: November 15, 2017, 03:56:03 PM »
If the choice is between $675K earning something between near nothing and 1.25%, vs. paying $445K in debt costing something between 3.95% and 4.375%, paying the debt is better.

If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.

See Investment Order for more details.

ILikeDividends

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Re: What would you do?
« Reply #2 on: November 15, 2017, 04:56:04 PM »
If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.
Depending on your investment horizon, and risk tolerance, the longer you are willing to keep the money in stocks, the closer you are likely to come to realizing the long-term performance.

Many here might argue to put the whole 675K into an index fund at once, and that would probably be the best advice, historically.  But it can be psychologically difficult to maintain the discipline if a downturn occurs immediately thereafter.

Here's a suggestion to get your feet wet, while allowing your own risk-psychology to adjust over time.

Divide your wad into 24 chunks; $28.125K each chunk.  Then put one chunk into the market every month, for two years.  On down months, increase your chunk for that month, say by 15%, and re-balance the remaining chunks.  On up months, do the opposite; i.e., reduce that months chunk by some percentage, and re-balance the remaining chunks again.

At the end of two years, you will be fully invested at a dollar-cost average price, and you will have had time to acquire a realistic perspective of risk vs reward in stocks as compared to a "safe" (but paltry) 1.25% in a savings account.  The S&P 500 pays a dividend higher than that.

For whatever it's worth, my "gut feelings" have cost me far more real money than any I would have ever lost in a broadly diversified market move downward.  A market move down only costs you something if you sell when it goes down.

If the percentage of your business funded by debt is generating income faster than 3.95%, I would be inclined to keep that debt, and just let the business pay it off over the course of time.  Depending on future circumstances and opportunities, it might even make sense to take on more debt.
« Last Edit: November 15, 2017, 05:47:21 PM by ILikeDividends »

jleo

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Re: What would you do?
« Reply #3 on: November 15, 2017, 08:46:16 PM »
I also considered buying a property and doing Airbnb out of it has anyone had success doing this, the ROI on a regular rental isn't high enough here to make sense but Airbnb type rental seems to be more work but also pull in more money, any thoughts on this?

JLee

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Re: What would you do?
« Reply #4 on: November 15, 2017, 09:22:53 PM »
I think your investment/cash allocation is backwards.

Assuming your job is reliable, my decision would likely be to put $215k into a Vanguard VTSAX and keep $10k as a cash / emergency fund buffer.  With the firehose of an income you have, you should be able to put a LOT of money away very quickly.

I am comfortable with that amount of risk..you might want to do a stock/bond split, etc.

surfhb

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Re: What would you do?
« Reply #5 on: November 15, 2017, 10:33:26 PM »
Youre only 27.....you have another 50-70 years left on this Earth.

A sharp correction in the market would be a gift from God.   Yes, you would lose value but you would also be buying at value levels.   

I'd pay off the business loan, set up an emergency fund, refy the mortgage to a lower rate , invest the rest and keep making 200K and investing

You're a very fortunate person...congrats
« Last Edit: November 15, 2017, 10:42:50 PM by surfhb »

Bicycle_B

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Re: What would you do?
« Reply #6 on: November 15, 2017, 10:38:33 PM »
I also considered buying a property and doing Airbnb out of it has anyone had success doing this, the ROI on a regular rental isn't high enough here to make sense but Airbnb type rental seems to be more work but also pull in more money, any thoughts on this?

Airbnb could turn less efficient easily and then you'd be stuck with a bad rental property.  Plus rentals and airbnb take work... arguably work where the $/hour could easily be less than what you earn at your regular job.  Why buy a medium job when you already have a good job?  You're on track to achieve FI quickly, assuming normal Mustache spending, so no need for real estate.  Don't buy in an expensive area unless you want to live in the thing IMHO.

Simpler to go with stocks or debt repayment or both.  For safety, 10% cash is plenty, plus your job adds more.  One fairly safe option: put some into stock and some into debt repayment, leaving a cash reserve of 3 to 6 months' expenses. 

You haven't stated goals or spending patterns, but the above generalities assume your goal is FI in the most efficient way safely possible.  In that case, you are very safe.  Make the investments and move on.

http://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/
http://www.mrmoneymustache.com/?s=math

jleo

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Re: What would you do?
« Reply #7 on: November 16, 2017, 11:37:28 AM »
I also considered buying a property and doing Airbnb out of it has anyone had success doing this, the ROI on a regular rental isn't high enough here to make sense but Airbnb type rental seems to be more work but also pull in more money, any thoughts on this?

Airbnb could turn less efficient easily and then you'd be stuck with a bad rental property.  Plus rentals and airbnb take work... arguably work where the $/hour could easily be less than what you earn at your regular job.  Why buy a medium job when you already have a good job?  You're on track to achieve FI quickly, assuming normal Mustache spending, so no need for real estate.  Don't buy in an expensive area unless you want to live in the thing IMHO.

Simpler to go with stocks or debt repayment or both.  For safety, 10% cash is plenty, plus your job adds more.  One fairly safe option: put some into stock and some into debt repayment, leaving a cash reserve of 3 to 6 months' expenses. 

You haven't stated goals or spending patterns, but the above generalities assume your goal is FI in the most efficient way safely possible.  In that case, you are very safe.  Make the investments and move on.

http://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/
http://www.mrmoneymustache.com/?s=math

I am slowly pulling cash out of my business as I am looking at not being so heavily invested in it, with that being said the 200k this year will likely go down to 150k in 2018 and 100k in 2019 with an exit plan of 2021 or 2022 at that point business would be pretty depleted so worth around 200k, my expenses are around 4k a month including the mortgage.

My goal is to have enough passive income to be able to do whatever I please and not have a business that is so dependent on me.

I would rather make 50k a year with paid off mortgage and as little of expenses as possible and live a simple life then 200k a year and be stressed out not enjoying what I do.

The million dollar question is how to generate the 50k in passive income by 2021.

SeattleCPA

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Re: What would you do?
« Reply #8 on: November 16, 2017, 02:00:05 PM »
If the choice is between $675K earning something between near nothing and 1.25%, vs. paying $445K in debt costing something between 3.95% and 4.375%, paying the debt is better.

If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.

See Investment Order for more details.

+1 to the above...

For what it's worth, moving the business savings currently earning  0% to the mortgage costing you 4.375% seems like an awfully attractive option.

You could, if you felt guilty about this, use your resulting principal and mortgage interest savings ($1K to $2K a month?) to begin dollar-cost-averaging money into stocks.

JLee

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Re: What would you do?
« Reply #9 on: November 16, 2017, 02:35:36 PM »
I also considered buying a property and doing Airbnb out of it has anyone had success doing this, the ROI on a regular rental isn't high enough here to make sense but Airbnb type rental seems to be more work but also pull in more money, any thoughts on this?

Airbnb could turn less efficient easily and then you'd be stuck with a bad rental property.  Plus rentals and airbnb take work... arguably work where the $/hour could easily be less than what you earn at your regular job.  Why buy a medium job when you already have a good job?  You're on track to achieve FI quickly, assuming normal Mustache spending, so no need for real estate.  Don't buy in an expensive area unless you want to live in the thing IMHO.

Simpler to go with stocks or debt repayment or both.  For safety, 10% cash is plenty, plus your job adds more.  One fairly safe option: put some into stock and some into debt repayment, leaving a cash reserve of 3 to 6 months' expenses. 

You haven't stated goals or spending patterns, but the above generalities assume your goal is FI in the most efficient way safely possible.  In that case, you are very safe.  Make the investments and move on.

http://www.mrmoneymustache.com/2016/02/29/what-to-do-about-this-scary-stock-market/
http://www.mrmoneymustache.com/?s=math

I am slowly pulling cash out of my business as I am looking at not being so heavily invested in it, with that being said the 200k this year will likely go down to 150k in 2018 and 100k in 2019 with an exit plan of 2021 or 2022 at that point business would be pretty depleted so worth around 200k, my expenses are around 4k a month including the mortgage.

My goal is to have enough passive income to be able to do whatever I please and not have a business that is so dependent on me.

I would rather make 50k a year with paid off mortgage and as little of expenses as possible and live a simple life then 200k a year and be stressed out not enjoying what I do.

The million dollar question is how to generate the 50k in passive income by 2021.

$1.25 mil in investments would do it.

jleo

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Re: What would you do?
« Reply #10 on: November 16, 2017, 03:01:07 PM »
If the choice is between $675K earning something between near nothing and 1.25%, vs. paying $445K in debt costing something between 3.95% and 4.375%, paying the debt is better.

If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.

See Investment Order for more details.

+1 to the above...

For what it's worth, moving the business savings currently earning  0% to the mortgage costing you 4.375% seems like an awfully attractive option.

You could, if you felt guilty about this, use your resulting principal and mortgage interest savings ($1K to $2K a month?) to begin dollar-cost-averaging money into stocks.

I have thought about this my worry seems to be the fact of a paid off house getting sued with it I have heard your better off with investments then with a paid off mortgage when it comes to being sued especially if people find out your home is paid off, I am not saying there is a high chance of this happening but in the world we live in there is always someone looking for an easy way out and seems like people getting sued these days for the stupidest things, I just want to make sure my assets are as secure as possible in a event like that happened. I do carry 1 million coverage on home and 1 million umbrella. Am I being a worry wart or do other people have this concern and what is the best way to stay protected in such an event.

MDM

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Re: What would you do?
« Reply #11 on: November 16, 2017, 03:44:11 PM »
Am I being a worry wart...?
That's in the eye of the beholder.

What risk level would you consider acceptable - 10%, 1%, 0.1%, 0.01%, ...?

Bicycle_B

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Re: What would you do?
« Reply #12 on: November 16, 2017, 03:47:08 PM »
In business school, I was taught that a paid for house is one of the few things you usually can't be sued for.  Or more accurately, a paid for home is often an asset that you can keep - even if there's a judgment against you, they can't usually collect the house, they just bother you for the money and wish you would pay.  Not sure if that's really true, though.  Check on homestead rules/law/precedent in your state, though, I think these things are by state.
« Last Edit: November 16, 2017, 03:49:05 PM by Bicycle_B »

surfhb

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Re: What would you do?
« Reply #13 on: November 16, 2017, 05:41:58 PM »
If the choice is between $675K earning something between near nothing and 1.25%, vs. paying $445K in debt costing something between 3.95% and 4.375%, paying the debt is better.

If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.

See Investment Order for more details.

+1 to the above...

For what it's worth, moving the business savings currently earning  0% to the mortgage costing you 4.375% seems like an awfully attractive option.

You could, if you felt guilty about this, use your resulting principal and mortgage interest savings ($1K to $2K a month?) to begin dollar-cost-averaging money into stocks.

I have thought about this my worry seems to be the fact of a paid off house getting sued with it I have heard your better off with investments then with a paid off mortgage when it comes to being sued especially if people find out your home is paid off, I am not saying there is a high chance of this happening but in the world we live in there is always someone looking for an easy way out and seems like people getting sued these days for the stupidest things, I just want to make sure my assets are as secure as possible in a event like that happened. I do carry 1 million coverage on home and 1 million umbrella. Am I being a worry wart or do other people have this concern and what is the best way to stay protected in such an event.

That's what umbrella insurance policies are for.   If you have insignificant wealth it would be wise to have one.   Plus, they are cheap. 

jleo

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Re: What would you do?
« Reply #14 on: November 16, 2017, 06:20:12 PM »
If the choice is between $675K earning something between near nothing and 1.25%, vs. paying $445K in debt costing something between 3.95% and 4.375%, paying the debt is better.

If you are willing to invest in stocks, history suggests (but does not guarantee) that would be better yet.

See Investment Order for more details.

+1 to the above...

For what it's worth, moving the business savings currently earning  0% to the mortgage costing you 4.375% seems like an awfully attractive option.

You could, if you felt guilty about this, use your resulting principal and mortgage interest savings ($1K to $2K a month?) to begin dollar-cost-averaging money into stocks.

I have thought about this my worry seems to be the fact of a paid off house getting sued with it I have heard your better off with investments then with a paid off mortgage when it comes to being sued especially if people find out your home is paid off, I am not saying there is a high chance of this happening but in the world we live in there is always someone looking for an easy way out and seems like people getting sued these days for the stupidest things, I just want to make sure my assets are as secure as possible in a event like that happened. I do carry 1 million coverage on home and 1 million umbrella. Am I being a worry wart or do other people have this concern and what is the best way to stay protected in such an event.

That's what umbrella insurance policies are for.   If you have insignificant wealth it would be wise to have one.   Plus, they are cheap.

I am pretty sure an umbrella policy has limited coverage in which if someone tripped in your house and sued you over your homeowners they would cover you but if lets say you got sued for a business deal or something like that I don't believe that would be something covered. I feel like there are a lot of exclusions on a umbrella policy but it was cheap enough to where it gave some piece of mind.

talltexan

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Re: What would you do?
« Reply #15 on: November 20, 2017, 09:11:13 AM »
You have a large business loan, but it's hard to tell how much risk is involved in your business without more details. That would affect how you want the other money deployed.

zinnie

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Re: What would you do?
« Reply #16 on: November 20, 2017, 09:27:41 AM »
OP, your gut is telling you the wrong thing. And is going to cost you a lot of money in the long term.

You said you want $50k per year passive income. So you need 50,000/.04 invested = $1,250,000.

The general MMM advice is to get the cash into the market, the sooner the better. You also said you are new to MMM, so maybe read up more first. A good one: http://www.mrmoneymustache.com/2012/01/13/the-shockingly-simple-math-behind-early-retirement/. You make a good income. You can reach FI quickly if you can get your savings rate up high.

ChpBstrd

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Re: What would you do?
« Reply #17 on: November 20, 2017, 11:56:57 AM »
It sounds like you are struggling with an aversion to risk. There are arguably less-risky options than going 100% into equities if that's what it takes you get you out of the savings account. Risk aversion is more likely than a severe correction to add years to your working career. Here are several ideas that could be combined into a portfolio:

-A bond fund like AGG, TLT, or something by Vanguard would lose a lot less in the event of a correction, but only yield a couple percent return otherwise. Still better than zero.

-If you are a sophisticated investor, you could invest everything in a super-liquid index fund like SPY or QQQ and then use options to set up a "collar". E.g. you could set up a scenario where your investment can only gain up to 10% but can only lose up to 10%.

-Stocks and funds focused on low volatility companies. Companies whose "beta" is <1 are less volatile than the market. Mature companies with less leverage are also less likely to fall as far in a correction. This is, of course, active investing, which typically underperforms, but the point is a low-volatility portfolio could be constructed.

-Preferred stocks (e.g. PFF) yield 5-6% these days and are low-volatility. You do get outsized exposure to the financial industry though. Put protection can be purchased cheaply.

-REITs that rent out apartments, medical facilities, storage units, or industrial properties yield 3-9% and are sometimes less volatile than the market. I'd avoid retail and office REITs, though.

-It is possible to earn 5-15% ROI on home efficiency improvements. E.g. replace your old HVAC with a high-efficiency model with programmable thermostat. Add shitloads of insulation. Replace old single-pane windows, etc. It is possible to deploy $10-30k in a way that virtually guarantees a decent single-digit ROI.

-You may have the option to buy a distressed property nearer your work and use your cash to reno it. You end up with a shorter commute, which has a big ROI, no rent/mortgage, and if done well, an unrealized capital gain. Your circumstances will dictate whether this is an option.

-Use some of your money to hire a tax advisor. With your high income and business, a 300%+ ROI is not outside the realm of possibilities.